Shares of Eagle Materials (NYSE:EXP) jumped over 10% last month, according to data provided by S&P Global Market Intelligence. The stock posted a 15% gain on a single day, March 28, when Sachem Head Capital Management disclosed a 9% stake in the building materials manufacturer. The hedge fund is attempting to break up the company to create more value for shareholders.
According to reporting by Bloomberg, Sachem Head Capital Management thinks Eagle Materials should divest its frac sand business, find buyers for its cement and wallboard segments, and institute a share repurchase program. Whether or not the plan materializes, investors were happy about the potential for change.
Shares of Eagle Materials have lost 1% in the last five years, which makes the company an easy target for an activist investor such as Sachem Head Capital Management. The business has recently struggled to combat rising raw materials expenses for its building materials, while the frac sand unit is at risk of becoming obsolete now that oil and gas producers prefer locally sourced proppants instead of Northern White Sand that has to be shipped hundreds of miles by rail.
That said, the business isn't exactly struggling. It delivered an earnings-before-income-taxes margin of 22.7% in the first nine months of fiscal 2019 (the year ending March 31), which is in line with historical levels of the last five years. The activist investor simply thinks the business could perform even better if it made several changes.
Shareholders might be eager for change at Eagle Materials given its five-year stock performance, but things can get messy when activist investors get involved. More importantly, activist investors don't always make decisions based on long-term thinking. Investors will need to wait for an official statement from management to see if the company is open to changes. The fact that CEO Dave Powers retired in early March, just weeks before Sachem Head Capital Management disclosed its growing stake, might be an indicator that change is indeed coming.